Should We Self-Insure?

Self-Insure

Should We Self-Insure?

A Re-assessment with the Coming of Kid 2

Hello folks! As always, thank you for visiting The Green Swan. Lately I’ve been forcing myself to reassess at a few legal and financial matters that will be impacted by having a second kid. It is never a fun process to dig into Wills, checking beneficiaries, analyzing life insurance considerations, etc., but it is very important. It is one of those things that the likelihood of ever coming into play may be very low, but the impact would be very large if it ever does. Sort of like a Black Swan event, the namesake for how I derived The Green Swan!

Self-Insure
Why do black swans have such a bad rap, they’re so pretty and majestic!

Also, my benefit enrollment period at work just came up which served as a reminder for me as I needed to decide if I wanted any term life insurance through my employer’s plan. So I thought I’d lay out some of my recent considerations (to thereby force myself to do the work) and also to get feedback from all my helpful readers to see if I’m letting anything slip through the cracks or failing to consider certain things. And lastly, hopefully this post can serve as a guide for any other folks out there about to have a child or other major life events.

So without further ado, let’s jump into it!

Liabilities and Concerns

Life Insurance

It is important to reassess the need for life insurance at every life stage. As I detailed previously in a guest post on Distilled Dollar blog, my focus has been on what obligations would be left behind for my spouse and kids. I will use this as my basis for determining what, if any, coverage I need and not simply a calculation of so many multiples of my annual income or other bogus metrics and rules of thumb. My wife doesn’t need to have a windfall if I end up passing early, and likewise, if my wife were to pass early I don’t need a windfall either. I always remember my Dad saying, half-jokingly, that you don’t want to be worth more dead than alive…

With that background, what sort of liabilities will I be leaving behind? And note that this analysis is focused on me passing early but could just as easily be flipped to my wife…the same considerations and ultimate conclusions for us wouldn’t change. For us, the primary focus is on leaving behind a home mortgage and two kids.

The Home Mortgage

Fortunately though, our home mortgage isn’t huge and the ongoing mortgage payments, including insurance, taxes, and utilities, would be within the means of my wife to continue to pay with her ongoing employment income.

Alternatively, she could downsize the home. I don’t know that I would necessarily recommend this though, as we live in a good school district for our kids and it would be an added hassle for her. If she were to downsize though, I would suggest it be in the case of wanting to move back closer to other family (if she felt the need).

And lastly, another consideration for my wife would be refinancing the home to make the annual mortgage payment more manageable (stretching the current balance out over a fresh 30 year period). This would be a feasible option as we have paid off a good portion of it and a new 30-year mortgage would help spread out the repayment more.

Kids

Kids are expensive, but as parents we do control that to a degree. While kid expenses have been reasonable for us so far, it is hard for me to gauge the costs as they get more involved in activities and also begin to devour food like they are offensive lineman.

For the sake of being conservative, I think it is fair to estimate approximately $10K per kid per year. This would include the continued use of daycare in younger years, and that expense being replaced by greater budgets for activities, food, and clothing as they age. Soon to have our second kid, this would be $20K annually.

This would still likely fit within a reasonable budget for her, but wouldn’t leave much room for continued contributions to retirement investments.

Additionally, my wife and I have always planned to pay for a meaningful portion of our kids college expenses (if not the entire amount). Fortunately, we’ve been very active in establishing and investing in 529 accounts. The 529 account for our first born will be fully funded next year with no real ongoing contributions necessary, we’ll just be relying on compounding over his next 15 years before college.

We will also begin contributions for our second child’s 529 next year. Our plan today is to put approximately $70,000 or so into each account with contributions early in their lives to take advantage of the tax benefits as they compound. Funding the 529 account for our second kid is a note-able issue for my wife to fulfill to some degree, depending on when my untimely death would be of course.

Car Loan

We do currently have a car loan. There is a $24,000 balance right now and the value of the car, per Kelly Blue Book estimates, is approximately $21,000. We also have a second car valued at approximately $4,000 with no loan. The easy solution would be to sell the second car since it would no longer be necessary.

My suggestion to my wife would be to sell the old car and use that money to pay down the loan on the new car. The new car is nice and bigger and keeping that will be more hassle free than keeping the older car. The ongoing loan payment would be manageable for her. She could sell some investments to pay this off if her income is too stretched though.

Burial Costs

Burial costs definitely need to be considered and shouldn’t be underestimated. Costs can easily run $5K-$10K. Plus, it is fair to assume a period of grieving where Lucy may prefer to take some time off work. Everyone reacts differently to these situations, so it is hard to say. On the flipside, she could be very motivated to return to work to take her mind off things. Either way, there will be meaningful “transition” costs.

Survivor Benefits

While it is important to note all the meaningful costs that we would be leaving behind for our spouse to fully bear, there are also benefits we need to consider which will be different for everyone. For my wife and I, the survivor benefits we need to consider include employer provided life insurance, social security survivor benefits, and our existing investment portfolio.

Employer Provided Insurance

For both my wife and I, our respective employers provide $50,000 in life insurance at no cost to us. This money would go to our spouse (the designated beneficiary) upon death. I view this bucket to cover the burial costs with plenty left over.

The remaining left over could perhaps be used to fund the remaining amount needed to fully fund Kid #2’s 529 plan, paying off the car loan, moving costs if my wife decided to downsize or move closer to family, or other miscellaneous expenses such as daycare.

Social Security

My wife and I have both worked long enough, and earned enough “credits” in terms of how much we’ve paid into Social Security, to be able to draw survivor benefits if either I or Lucy were to die. These benefits would include a payment for the surviving spouse and additional amounts per child.

I recently pulled up my most recent estimate of Social Security Survivor Benefits online and I’d recommend you to do so as well. You can create an account at My Social Security.

If I were to pass early, my family survivors would receive total family benefits of about $5,000 per month. Although if my wife were to keep working (which we’d expect to be the plan) some portion of these proceeds would be taxable. And, alternatively, if Lucy were to pass early, the total family benefits for me and the kids would be about $4,000.

Even if these were taxed on a federal basis and the net proceeds were $4,000 and $3,000 per month ($48,000 and $36,000 per year), respectively, this is still meaningful especially considering the relatively frugal lifestyle we are accustomed to. This alone would cover the majority of our annual expenditures.

Our Investment Portfolio

As I mentioned in the Net Worth Explosion post, our investment portfolio is currently in excess of one million and growing significantly each year we are both alive and contributing. This alone could provide a significant source of income for a family, especially with one less mouth at its teet.

Assuming a safe withdrawal rate of 3.3%, this portfolio would provide $33,000 of funds available per year, a very conservative estimate in my mind which should allow for the portfolio to continue to grow and kick off the same nominal amount indefinitely (and I think Libre and ERN agree with this safe withdrawal estimate).

Similar to the Social Security benefits mentioned above, this amount could cover the majority of our annual expenditures. But in reality, this portfolio would continue to compound without being needed for anything more than perhaps to fill a small budgetary hole every now and again.

Approximately 20% of our investment portfolio is held in a taxable account and my investment in the small business with my siblings. Both of which would be easy to access without significant tax implications and no penalties for withdrawal (as would be the case from the tax advantaged retirement accounts).

Some of you may be questioning how liquid the small business investment would be, but I am certain that my siblings have the willingness and the financial condition to buy my share back and pay my wife. As a matter of fact, this point was discussed in great detail among all of us and the legal function to do so is written into our operating agreement.

Conclusion

In conclusion, even with a pending second child I do not see the need to buy any life insurance for either my wife or I.

  • The small life insurance policy provided by our employers would be more than enough to cover burial costs, other miscellaneous “transition” costs as well as the car loan.
  • The social security survivor benefits would be more than enough to cover the ongoing costs to raise our kids with excess funds that could be used to fully fund any remaining 529 account needs.
  • My wife and I’s expectation would be to return to work after the early passing of a spouse which would provide more than enough income to support our lifestyle and ongoing mortgage payments.
  • And lastly, our current sizeable investment portfolio would be there to fill in any needs, but would likely remain untouched indefinitely and continue to compound and grow.

Have I missed anything? What other considerations have you made in terms of whether to buy life insurance or not?

Thanks for taking a look!

The Green Swan

 

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53 Comments

  1. Love the detailed analysis – you’ve obviously thought this through. The only calculation I didn’t see in your post is what would happen if you were to both pass away at the same time. Obviously all your assets would be sold, and the kids would still get the SS survivor benefits, but you’ll want to run the numbers to make sure that all your needs for your children would be covered in that scenario. Looks like they probably would be, though.

    1. Yes good point! And thanks for mentioning that. We do have arrangements set for who the caretakers would be in that scenario. Regarding the financial aspect, we’ll have the same college considerations and the cost of living would likely be covered easily by social security. Should have mentioned this in the article, thanks again for bringing it up!

  2. Sounds like you’ve covered everything GS. I shake my head when I hear of people’s million dollar-plus life insurance policies. As you put is so succinctly, a partners untimely death is not reason for a windfall for the remaining person. Great analysis and I agree with your decision not to purchase further insurance based on your current set-up.

  3. I was also looking at insurance this week, as open enrollment is upon us. While we do not have kids, I do not feel a need to have much of a policy. My wife and I both work and make relatively similar salaries. We don’t have a mortgage or a car loan. There’s just not much need for a windfall there, like you said.

    I do want to up the policy when kids are in the picture. I want to make sure that the life insurance (when combined with my investments and survivor benefits) would cover day care or the cost of living expenses until the kids are in school so that my wife could choose whether to work or not while the kids are young. That said, it is entirely possible that my investments could grow to that level on their own by then and I wouldn’t need the life insurance booster.

    Thanks for the thoughts!

    1. Yes that’s the same thought process wr had as we were approaching kids for the first time. When we had the first we ended up concluding it wasn’t necessary.

      Glad to hear we are thinking along the same lines! Thanks for the comment, Matt!

  4. I think you’ve covered all the bases. Insurance is very personal. There’s no standard that everyone can follow. What works for one family is too much for another family, and not enough for yet another. The biggest thing you have to do is play the what if game and see how you would get along financially if one spouse passed early. You’ve done this and assessed all your needs. Anyways, great post and thanks for sharing your thought process through this decision!

    1. Yes, very individual process indeed, and a number of scenarios to think through. As Liz mentioned in her comment above, I failed to mention the scenario where both Lucy and I were to pass.

      Thanks for the feedback, GFY!

  5. I personally am a bit biased towards having more life insurance than you think you need. I like Suze Orman’s advice which is that you have no idea how the early, unexpected death of a spouse will impact you. I think she’s right. Some may never be able to go back to work due to the emotional impact of the death. This is exactly why I took out a million dollar life insurance policy on top of my work’s default/free life insurance coverage.

    1. I am very sensitive to this viewpoint and don’t disagree one bit. I’ve seen this happen first hand twice with family friends and it can be very difficult to move on. Definitely an important consideration to make! Thanks for mentioning that, DC!

  6. Liz beat me to it, mentioning the unthinkable situation of the two of you passing at the same time. Also, what if you passed and your wife became incapacitated? Or depressed or overwhelmed by suddenly dealing with everything on her own? DC mentioned that too. As Holly pointed out, term insurance is so cheap.

    1. Liz, DC, Emily, yourself…all making great comments and providing valuable feedback!

      In the specific scenario you mentioned where I pass and my wife is disabled, the SS safety net will help. The survivor benefits from my SS in that scenario would be $4,250 / month for the family, or $51,000 per year. And the SS disability benefit for my wife would be $1,800 per month, or $21,600 per year. This would be a tough scenario and tight from a financial perspective, but I think combined with our existing investment income we will be fine. Definitely worthy of further thought though.

      Thank you for the great feedback and let me know if you think I’m missing anything else here? Similar to my response to Emily, this great feedback is why the personal finance blogging community is the best!

  7. An interesting point about the assumption that one parent survives…I know for us, we’d feel a lot more confident in Little Bit’s financial security in that scenario than if she has to end up with a guardian. The other wildcard is if there are big medical bills involved. If you are both in an accident and one of you is seriously injured, or if there is an extended hospital stay before death, the calculations are very different. That may be gruesome and gory, but you are planning for a worse-case scenario.

    1. Emily, you raise some good points that are definitely worthy of consideration!

      If both Lucy and I were to pass, the child survivor benefits would be a combined $3,900 from Lucy and my SS benefits per kid per month, or $46,800 per kid per year. In that scenario, the guardians would have plenty of money to raise them and put them through college (along with the current 529 plan investments).

      If either Lucy or I were disabled instead of dying, that would be a more tight scenario I would suspect. The SS disability benefits would be a combined $4,245 per month, or $51,000 per year. Combined with our existing investment income though, we may be fine. Worthy of further consideration though!

      And lastly, on the scenario of requiring significant healthcare prior to a death, I don’t think this would be too bad of a scenario (financially). The max out of pocket on our health insurance policy would be hit which is around $10,000.

      Am I missing anything, you think? Thanks so much for the great, thought-provoking comment Emily. This is one of the main reasons I love the personal finance blogging community.

      1. The only other issue I see after that is long term care if needed, but that may be a different issue. (In NC, $68K a year or more for nursing homes, $35K or more for home health aides according to longtermcare.gov) Most of it is not covered by health care or disability insurance, but it would only come into play in a few scenarios.

  8. I think this is a very prudent plan. A lot of personal finance bloggers seem torn on the benefits of life insurance, but I’m all about it. I don’t receive benefits from work, but I do intend to sign up for life insurance through my insurance company–this week, in fact.

    My thought process is that, while we have any debt at all and don’t have the option to retire, life insurance is necessary. The only point I would consider eliminating it is if we had zero debt, retired early, and were living beneath our means. Even then, burials are incredibly expensive, so I’m not sure if I would ever drop it entirely, especially once we have kids.

    1. Yes lots of factors to weigh, Mrs Picky Pincher! I think you are thinking about it right and a simple, relatively low cost term policy may suit your families needs.

      Best of luck finding a good solution this week! I’d love to hear how it turned out for you.

      Thanks for the comment!

  9. Great analysis! We took out a 20 year term policy on each of us 13 years ago when the kids were still little. We purchased enough to make sure all liabilities and college costs were covered, and also considered child care costs and income loss if one, or both of us, were to die. 13 years later, we are probably over-insured, but I still feel comfortable having the extra “just in case”. It will be interesting to re-evaluate when we have to get another policy in 7 years.

    1. Good for you folks, Amanda! Sounds like you thought it through thoroughly. And timing may work out when it expires in that your kids will be off to college and becoming more self sufficient. You might have a considerably less need for life insurance if any at all!

      Thanks for sharing!

  10. Thanks for the reminder about getting or updating a will. We talked about drafting one up when our 17-month was born, now baby #2 is coming in April and we still don’t have one.

    After our first baby was born, my wife & I took out term life insurance policies that are high enough to cover our current debts and any additional expenses. We got slightly higher policies at that time as we were planning on having more children in the coming years, plus I don’t want another medical exam sooner than I have to.

    1. You bet, Josh! Wills are definitely important. Each state has the private rules set up differently I found out, whereas if your or your wife would pass your assets could be split among your wife and/or your parents etc. Weird rules for sure so setting up your own will and taking the decision out of the government or court would be wise.

      Thanks for the comment, Josh!

  11. Great post. My employer offers very good life insurance coverage (about 3xs income) so it is sufficient. When we had kids, I considered getting a policy outside of work since there would not be coverage if you were either laid off or quit that job but I never ended up getting another policy. I’ve still considered it but ultimately I think we will self-insure. I am glad that you mentioned Social Security because not many people consider that or know that it provides an extra safety net. I just signed up for an account to see my benefits so thanks for the info. (Kinda sad that I didn’t know about that since I worked at that agency for a few years…it was a long time ago though!)

    1. Good thought about the prospect of losing your job and thereby the insurance benefit. But that’s awesome you get great coverage by your employer!

      Haha and you even worked at the agency! That’s funny :). Yes a nice safety net for sure that many don’t consider. It can take a certain amount of time to build credits and qualify, but otherwise you’re good to go.

      Thanks for the comment, Andrew!

  12. Hey JW – a very nice read (as usual)…and many thanks for the shout!

    I’d say a 3.3% withdrawal rate is pretty durn safe, provided the right sort of portfolio allocation. (Up to 3.5% passes most sniff tests.) And, as you note, I think ERN has also concluded that same withdrawal range is safe and sustainable. The two of us went about deriving the figures different ways, which probably reduces the chances of the figures being totally wrong!!

    Cheers.

    1. Thanks, Libre!

      Haha and good point about you two going about it different ways and so more reliable! You both provided great resources, as have others who’ve written extensively on SWR. I’ll follow your leads!

      Thanks for stopping by!

  13. It truly is a labor of love to think through the possibility of unpleasant circumstances and prepare thoroughly for them. I’m sure you each appreciate that you’ve done just that. It was having a kid that finally motivated us to get our will in order. That is great that you’re generously seeding your kids’ college funds as 15 years isn’t a terribly long amount of time for interest to accrue.

    1. Yes, definitely an awkward topic too write about. I sort of write it without actually trying to think of the consequences or circumstances of what I’m actually saying!

      It all started with kids for us too! With the Will especially, after I was done I regretted not valuing its importance prior and getting it done sooner. It’s totally necessary with or without kids!

      Thanks for stopping by, Kalie!

  14. We self-insure for many of the reasons you wrote about but it does help that our kids are older too. We have death benefits at work and we have properties that can be sold to set them up in early adulthood. The long-term care costs are the scary thing as Emily mentioned…

    1. Great, Vicki! Thanks for sharing. And yes, I agree the long term care piece is scary. My employer, like many others I believe, offers relatively cheap insurance for this fortunately.

  15. Nice thorough analysis. I think based on your numbers your more then covered. Honestly for us we keep just enough for my wife to have a two year adjustment period to go back to the work force. Technically we’re probably in the self insure zone as well but insurance is pretty cheap at the levels we need. I actually reduced work insurance this year to avoid imputed income tax, my private insurance was cheaper.

    1. Thanks, FTF! That sounds like a good strategy to have a two year cushion setup. Thanks for sharing that!

      Interesting that you found private insurance to be cheaper. I’m not sure if my employer covers some of the cost, but I always found insurance through them to be cheapest. But it was a while ago that I priced it out too so it may have changed for me.

      Thanks for the comment.

  16. I think you nailed it!!! While not pleasant to think about I think you really covered all the bases. I am able to get 5x my income at work for life insurance. Since we don’t have any expenses and are a couple of years from FIRE. This should more than cover any untimely death by me. Although here’s hoping that my wife never has to deal with it 🙂

    1. Nice! Your employer provides that coverage for you? Good deal if so, definitely takes any worry out of the equation for you and your wife.

      Thanks for sharing, Mustard Seed.

  17. Interesting, and logical, post. I may be a bit biased here (I have experience working in the life insurance industry), but a bit of whole life insurance may not be a bad idea to round out your plans. Sure, the growth isn’t phenomenal, but it’s safe, tax-free growth and tax-free withdrawals nonetheless. Not to mention the extra death benefits in case something were to happen. However, this would definitely be more of an investment than an insurance policy, and it sounds like your investments are doing just fine already! Just some food for thought.

    1. Thanks for sharing your perspective, Nicholas! Always good to get another viewpoint, especially from a knowledgeable source with experience in the industry.

      The tax free aspects of whole life are appealing but not sure how the returns would stack up against the S&P still. Definitely something to look into more. Thanks for sharing that!

  18. Hey TGS – this is a good blueprint for anyone considering life insurance, thanks for posting it.

    As a single income household I want a life insurance insurance policy that leaves the survivor in a ‘work is optional’ situation. The last thing I want is for my kids to lose both parents – one to death and the other to making ends meet.

    If a person is at or near financial independence, then life insurance would be unnecessary. Sounds like you and your family are set up well should tragedy befall one of you.

    1. Great point, Ty, the situation would definitely change for me if it was a single income household. And the day may come where my wife may want to stay home with the kids and so at that time we’d have to take another close look at insurance needs. Thanks for the great comment!

  19. We still carry life insurance for both of us. It’s a legacy from when we were less affluent. But we definitely think about letting the coverage for the term policies lapse once we retire. We should have all the (self-)insurance that we need at that time. Until then it’s nice to know that the surviving spouse can get a bump in the Net Worth to afford early retirement and deal with some of the costs, including the less advantageous tax filing status as “head of household” instead of “married filing jointly”
    Thanks for this important post and the reminder about contingency planning! Cheers!

    1. That’s the thing, in retirement life insurance becomes much less of a need. Then your assets would be for one rather than two and make retirement ask the more easy to afford. Good point, ERN.

      Thanks for sharing!

  20. Hi GS,

    A good analysis and thought process through! I think on your analysis you are spot on in that you don’t need any insurance for that, your portfolio is enough with your other half’s cover should the worst happen, however a couple of thoughts (I am not sure how the US Health System works, so it may be covered by medical insurance):
    1. As others have said – what happens if you both pass away – not only who will manage the estate and look after the children, but how will they be set
    2. What about critical illness and long term care – e.g. not necessarily death but say permanent vegetative state – how will this be covered?

    As you say its not nice to think about, but it is important to think about. I have a lot of insurance at present because our mortgage is high, and if I weren’t able to work for whatever reason my other half would be covered. I would look to reduce my insurance costs over time as I build up higher savings and lower mortgage.

    FIREin’ London

    1. Good points, Fire In London! Thanks very much for the feedback!

      The first scenario you mentioned is an important consideration and I should have outlined that in the post. Emily had the same point and, as I responded to her, the guardians have been established for the kids and they would get pretty significant annual proceeds from SS so they should be set.

      Regarding your second scenario, this too is an important consideration! For us, we do have optional long term disability insurance through our employers which would provide coverage in that situation.

      Definitely not fun situations to think about, but it is best to be prepared for anything! Thanks for sharing your circumstances. I think your situation makes total sense given the mortgage and your plan to reduce coverage as savings increase and the mortgage is paid down.

      Thanks again for the great comment!

  21. Good post GS. We self insure too, and when your net worth is in 7 figures, taking additional term or whole insurance is not necessary unless your family’s expense needs are beyond the ordinary. Good luck with Kid 2 – exciting times ahead for you guys.

  22. I think you’ll be pleasantly surprised to hear that the cost of a second child is typically much lower than the first. But, if the single parent returns to work after the death of their spouse, will you have to add child care costs into the equation? Because those can be more than significant.

    1. Yeah childcare is nothing to sneeze at! We both work right now and our first is currently in daycare. We anticipate the same for #2 so costs will be significant in the early years.

      Thanks for the comment!

  23. I’ll be honest, I freaked out when I saw the headline. But then relaxed when I read about your sizeable investment portfolio as your back-up. I worry about the “what-ifs.” It’s unlikely either of you would pass before your children are working adults and even more unlikely, though not impossible, that both of you would pass at the same time. I also worry over how unpredictable the future can be – the other spouse may not be able to return to work, the economy may change, perhaps one of you died in a horrific accident and the other becomes disabled, what’s a good community now may not be in 10 years, any number of things can derail a plan.However, in your circumstance, it looks like, via investments, you’ve already thought about how much you would need and have ample funds set aside to make sure that your family’s standard of living is unharmed. Congratulations on your planning and congratulations on baby #2!

    1. Yea we’ve tried to think of a number of what ifs and you even mentioned done that I hadn’t thought of. It’s important you think through them all and, you’re right, the one thing that definitely helps us is our investment portfolio.

      Thank you, Penny!

  24. Definitely not a fun discussion to have, but it’s necessary. We are in the process of drafting our will and can’t believe we haven’t done it prior to this considering we have two kids. I lost so many great benefits moving from my corporate job to staying at home, we absolutely need to buy life insurance. I have to admit I’m a little surprise you have vehicle loans. 🙂 Great read.

    1. Good for you folks, better late than never. And unfortunately it’s not a one and done thing, it’s important to stay up to date as life and circumstances change.

      Haha yes we have a loan on the new car we bought last year. We planned to pay cash, but then realized how cheap of a loan we could get and choose invest the money instead. Our car loan is under 2%!

      Thank you, Kelsey!

    1. Well glad you can take a fresh look at it now. Many forget about the social security benefits which can be nice once you’ve earned enough credits!

      Thanks for stopping by, Latoya!

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